U.S. attorney said to subpoena MF Global

U.S. Attorney Patrick Fitzgerald in Chicago issued subpoenas in a probe of MF Global Holdings Ltd., the broker-dealer parent that filed for bankruptcy Oct. 31, a person familiar with the matter said.

MF Global, which was run by former New Jersey Governor Jon Corzine, sought Chapter 11 bankruptcy after a $6.3 billion bet on the bonds of some of Europe’s most indebted nations prompted regulator concerns and a credit rating downgrade.

The Wall Street Journal reported yesterday that the office of U.S. Attorney Preet Bharara in Manhattan also issued subpoenas in a probe of MF Global.

The person familiar with the matter, who didn’t want to be identified because the investigation isn’t public, said federal prosecutors in New York haven’t issued criminal subpoenas. He said Fitzgerald's office sent subpoenas early in the process and no more have been issued.

Randall Samborn, Fitzgerald’s spokesman, declined to comment yesterday on whether the office had issued subpoenas in the probe. Carly Sullivan, a spokeswoman for Bharara’s office, said the office doesn’t confirm the issuance of subpoenas and declined to comment further.

MF Global also is the subject of a formal FBI investigation, a person familiar with the matter said earlier this month. Federal Bureau of Investigation agents are working with U.S. prosecutors in the inquiry, said the person, who declined to be identified because the matter isn’t public.

Liquidator Subpoenas

The liquidator of the company’s broker-dealer unit, MF Global Inc., also has served an examination subpoena on the parent, according to a previous court filing.

Trustee James W. Giddens won a judge’s permission on Nov. 4 to subpoena directors and officers of MF Global Holdings, saying he needs to find out if fraud or misconduct led to its bankruptcy and what lawsuits he might bring. He is working with regulators to find out how much of customers’ assets are missing, and where they are.

U.S. Bankruptcy Judge Martin Glenn denied a request by the parent to share the information gathered, saying Giddens must probe without interference management’s possible involvement in the alleged shortfall in its collateral for segregated accounts.

Commodity customers of the brokerage have a shortfall of about $593 million, according to a person with knowledge of regulatory probes into the failure of the New York-based firm.

“There have already been serious allegations of misconduct,” Glenn said, citing company lawyers who told the SEC on Oct. 31, when the company filed for bankruptcy, that there was a significant shortfall in its collateral for segregated accounts.

The subpoenas grant the authority to demand documents and question the brokerage firm’s officers, directors, lenders and trading partners, according to the trustee’s court filing. Corzine, who once served as a Goldman Sachs Group Inc. co-chief executive officer, quit MF Global Nov. 4.

Proprietary Trading

Separately, a member of the Commodity Futures Trading Commission said Wednesday that MF Global's collapse highlights the need for new regulatory policies allowing customers to know the size and scope of their derivatives brokers’ proprietary trades.

“Without disclosure to its customers, MF Global dramatically changed the risk profile of its proprietary operations and its incentives relating to customer intermediation,” said Scott O’Malia, a Republican member of the U.S. Commodity Futures Trading Commission, said in a statement released today in Washington.

Clients should be able to understand their brokers’ proprietary trades, risk practices for both proprietary and client trading and compliance policies that ensure their accounts are segregated, O’Malia said.

The CFTC is investigating about $600 million in missing client funds at MF Global

Spot Checks

“We have not identified the cause of the segregation shortfall,” O’Malia said.

The CFTC and self-regulatory organizations, including CME Group Inc., which oversaw MF Global, should have a system of random spot checks to ensure accounts are properly segregated, O’Malia said. O’Malia said brokers should face sanctions and other remedial measures if they fail either independent reviews of their accounts or the spot checks.

The CFTC should also revisit a rule that the agency completed on Oct. 18 that was designed to broaden access to derivatives clearinghouses, O’Malia said. The agency voted 3-2, with O’Malia in opposition, to publish a final rule requiring clearinghouses to open access to brokers with at least $50 million in net capital.

MF Global was among companies, including futures broker Newedge USA LLC, that supported the regulation. Representatives for Wall Street’s largest swap dealers, including Morgan Stanley and JPMorgan Chase & Co., said clearinghouse members need adequate resources to manage risks in the swaps market and handle potential defaults.

Demise

“MF Global was a clearing member at multiple clearing organizations and one of the main proponents of lower capital requirements for swaps clearing,” O’Malia said in the statement today. “In light of MF Global’s demise, the commission should revisit the open access discussion, to ensure that clearing organizations are able to diversify their membership without introducing risk.”

Gary Gensler, CFTC chairman, said at the agency’s Oct. 18 meeting that the rule was “one of the most significant rulemakings to lower risk” in the financial system.